Kế toán, kiểm toán - Chapter 11: Reporting and alayzing shareholder’s equity

CHAPTER 11:REPORTING AND ALAYZING SHAREHOLDER’S EQUITYLO 1: Identify and discuss the major characteristics of a corporation.LO 2: Record share transactions.LO 3: Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their financial impact.LO 4: Indicate how shareholders’ equity is presented in the financial statements.LO 5: Evaluate dividend and earnings performance.LEARNING OBJECTIVESA separate legal entitySeparate and distinct from its ownersHas most of the rights and privileges of a personMay be public or privatePublic: many shareholders, shares are publicly traded and heldPrivate: few shareholders, shares are closely held and not tradedThe Corporate Form of OrganizationSeparate legal existenceLimited liability of shareholdersTransferable ownership rightsAbility to acquire capitalContinuous lifeCorporation managementGovernment regulationsIncome taxCharacteristics of CorporationAdvantagesSeparation of management and ownershipSeparate legal entityLimited liability of shareholdersPotential for reduced income taxEase of transferring ownership rights (shares)Ability to acquire capitalContinuous lifeAdvantages and Disadvantages of a CorporationDisadvantagesIncreased cost and complexity to follow government regulationsIncreased reporting and disclosure requirementsWhy might the advantages of a corporation differ for a large publicly-traded company compared to a small private company?Discussion QuestionTo raise capital, the corporation sells ownership rights in the form of sharesShares can be divided into different classesUsually referred to as common shares and preferred sharesOwnership rights are specified in articles of incorporation or in by-lawsRights in voting, dividends, liquidationShare Issue ConsiderationsAuthorized sharesMaximum amount of shares allowed to sellMay be limited or unlimitedNot recorded; disclosed onlyIssued sharesNumber of shares soldLegal capitalShare capital cannot be distributed to shareholders - unlike retained earnings, which can be distributed as dividendsShare Issue Considerations (continued)First issue normally through initial public offering (IPO)Share price is set by the companyOnce issued, shares of publicly held companies trade on organized exchangesAt prices per share established between buyers and sellers (no direct impact on company)Fair value of shares – share price - is determined by market forcesIssuing SharesContributed capitalThe amount that shareholders have paid to the corporation for their sharesShares are usually issued for cashDr. CashCr. Common SharesShares can be issued in exchange for services or noncash assetsIFRS: Record at cash equivalent price (ideally the fair value of consideration received)ASPE: Fair value of shares given up or fair value of consideration received (whichever is more reliable)Issuing Common SharesIncrease trading on securities marketsReduce number of shares issued (increases earnings per share and return on common shareholders’ equity)Buyout hostile shareholdersHave shares available for compensation or other usesReasons to Reacquire SharesReacquired shares are a corporation’s own shares (either common or preferred) that had been previously issued and later reacquired by the corporationNormally retired and cancelledRemoved from the share capital accountCan also be held as treasury shares, for future resale, in limited circumstancesOnly in some provinces and foreign jurisdictionsReacquisition of SharesRemove cost of shares from share capital accountRecord the cash paidRecord the “gain” or “loss” on reacquisitionReacquisition of Shares - StepsShare capital can consist of preferred and common sharesPreferred shares have contractual provisions that give them priority over common sharesUsually do not have voting rightsAccounting for preferred shares similar to common sharesPreferred SharesDividend preferenceCumulative (dividends in arrears)Liquidation preferenceOther preferenceConvertible Redeemable/callable (company option)Retractable (shareholder option)Preferred Share PreferencesA pro rata (equal) distribution of a portion of a corporation’s retained earnings to its shareholders Cash dividends are most commonA distribution of cash to shareholdersStock dividends may also be issuedDividendsFor a cash dividend to occur, a corporation must:Meet a two-part solvency test (CBCA), andEffect a formal declaration of dividends by board of directorsThree important dates in connection with dividends:Declaration date Record datePayment dateCash DividendsDate the Board of Directors formally authorizes the cash dividendCommits the corporation to a binding legal obligation Example: declaration on December 1 of a $0.50 per share cash dividend on 100,000 common shares (100,000 x $0.50 = $50,000)Declaration DateDate ownership of shares is determined for dividend purposesDec. 22 No entry necessary Record DateDate dividend cheques are paid to shareholdersExample: payment date is January 20Payment DateCash dividend: paid in cashStock dividend: distributed (paid) in sharesFair value (on date of declaration) is assigned to the stock dividend sharesSame three dates (declaration date, record date, distribution date) as cash dividendsStock DividendsSatisfy shareholders' dividend expectations without spending cashIncrease marketability of the sharesIncreases number of shares and decreases market price per share Reinvest and restrict a portion of shareholders' equityUnavailable for future cash dividendsPurposes and Benefits of Stock DividendsAssume 50,000 common sharesBalance of $500,000 in Common Shares account and $300,000 in Retained EarningsIn a 10% stock dividend, 5,000 common shares (50,000 x 10%) would be issuedAmount debited to Dividends Declared account is $75,000 (5,000 shares x $15*)*$15 is the market price of the shares on the date of the stock dividend declarationStock Dividends - ExampleStock Dividend EntriesDeclaration DateStock Dividends Stock Dividends Distributable75,00075,000Record Date No entryDistribution DateStock Dividends Distributable Common Shares75,00075,000Decreases retained earningsIncreases common sharesTotal shareholder’s equity remains the sameEffect of Stock DividendsHow is a cash dividend and a stock dividend reflected on the statement of cash flows?Discussion QuestionA stock split involves the issue of additional shares to shareholders according to their percentage ownershipLike a stock dividend but much largerA stock split has no effect on total share capital, retained earnings, or total shareholders’ equityMarket value of the shares will decrease roughly proportionately to the splitStock SplitsEffect of Stock SplitComparison of Dividends and Stock SplitsIf you were an individual, would you prefer to receive a cash dividend, stock dividend, or stock split? Discussion QuestionContributed CapitalShare capital: preferred and common sharesContributed Surplus: amounts contributed from acquiring and retiring sharesRetained EarningsCumulative net incomes (net losses) since incorporationAnnual net income is added; net losses and dividends declared are deductedA portion may be restricted and therefore unavailable for dividendsPresentation of Shareholders’ Equity: Statement of Financial PositionAccumulated Other Comprehensive Income (IFRS)Other comprehensive income reported only under IFRS; not required under ASPEOther comprehensive income (OCI) includes certain gains and losses that bypass net income (such as revaluation gains and losses of property, plant, and equipment using the revaluation model)Accumulated other comprehensive income is the cumulative change in shareholders equity Starts with opening balance and is increased (decreased) by other comprehensive income (loss) each periodPresentation of Shareholders’ Equity: Statement of Financial Position (continued)Total comprehensive income (loss) includes net income (loss) and other comprehensive income (loss) (OCI)Accumulated Other Comprehensive Income (continued)Discloses changes in total shareholders’ equity for the period, including:Contributed capitalRetained earningsAccumulated other comprehensive incomeRequired under IFRSStatement of Changes in Equity (IFRS)For private companies, who typically have simpler share structures and few share transactionsShows the amounts and changes in retained earnings during the periodRequired under ASPEStatement of Retained Earnings (ASPE)Dividend record:Payout ratioDividend yieldEarnings performance: Basic earnings per shareReturn on common shareholders’ equityMeasuring Corporate PerformanceMeasures the percentage of profit distributed in the form of cash dividends to common shareholdersPayout RatioPayout ratio =Cash dividends declaredNet incomeHigher is better if investor looking for incomeMeasures the profit generated by each share, based on the market price of the sharesDividend YieldDividend yield =Dividends declared per shareMarket price per shareHigher is better if investor looking for incomeMeasures the income earned by each common shareBasic Earnings per ShareBasic earnings per share =Income available to common shareholdersWeighted average number of common sharesNot comparable between companiesIncome available to common shareholders= Net income – preferred dividendsWeighted average number of common sharesShares issued during the year x the fraction of the year they are outstandingExample: October 1 = 3/12 months if calendar year usedBasic Earnings per Share (continued)Measures the company’s profitability from the shareholders’ viewpointCommon shareholders’ equity= Total shareholders’ equity – legal capital of preferred sharesReturn on Common Shareholders’ EquityReturn on common shareholders’ equity =Income available to common shareholdersAverage common shareholders’ equityHigher is betterComparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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